Whom can retail investors trust? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Whom can retail investors trust? 

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In this issue:
» The mounting debt pile of China
» Interest rate futures coming soon...
» Capacity underutilization to add to auto woes
» Why Europe can't afford to be complacent?
» and more....

A harmless looking notification from the Forward Markets Commission (FMC) came in on July 12, 2013. And in the offices of the National Spot Exchange Limited (NSEL), a commodities exchange promoted by the Jignesh Shah-led Financial Technologies (FT), things began to change. The notification restricted NSEL from making fresh contracts available as they were flouting norms of Forwards Contracts Regulation Act. NSEL first changed its contract duration to comply, and then when it found customers leaving in droves, threw up its arms and shut down the exchange. More than Rs 55 bn was due. And over the next few days it became evident that there was neither the money nor the underlying spot goods to settle trades by over 15,000 investors. Since then, the story has unraveled, slowly.

How did all this happen? Jignesh Shah, the top management of Financial Technologies has had a shoddy track record with the market regulator SEBI itself. But what is interesting is that SEBI failed to send out the alerts until it was too late.

Six years ago, the Finance Ministry had said that it had adequate basis to conclude that FT, MCX and Shah are not fit and proper to acquire 5% stake in the Delhi and Vadodara stock exchanges. But just 5 days later, SEBI dismissed the Ministry's concerns and gave Shah the green light to acquire the shares. Less than a year later, SEBI again allowed FT to set up a new exchange, MCX-SX, for starting currency derivatives trading. Barely three weeks after it renewed MCX-SX's licence for currency derivatives trading, SEBI passed a detailed order on September 23, 2010, saying the promoters were dishonest and therefore not fit and proper to start equity trading.

This raises some serious questions about the manner in which the licenses were issued to MCX. How was Jignesh Shah declared fit to acquire shares and start currency derivatives trading? And then how can he be deemed dishonest and unfit to start equity trading?

This type of corporate governance standards are one of the factors which have kept retail investors from investing in the markets. Every day some new scam emerges. The role of policy makers, regulators is being questioned. Even though the equity markets are nearing all-time high, not all participants have been able to reap benefits from the rally. Retail investors are still finding it tough to survive in the market.

Statistics show that retail investors have largely been sidelined during the stock market rally over the past decade. Bonds and fixed deposits have instead been their 'go-to' investments. As per Economic Times, the daily cash market average volume of retail investors is down to Rs 46.15 bn so far in 2013, the lowest since 2003 and 66% down from peak of Rs 137.09 bn in 2009. Between 2003 and now, the share of retail investors in the total has shrunk to 34% from 65%. Scams, distrust in the regulator and company managements and the ghost of 2008 financial crisis are still fresh on the minds of small investors.

Thus what retail investors in India desperately need is a trusted source of information and an advisor who is both frank and independent.

Do you think regulators like SEBI should take the onus of building investor trust by bringing the defaulters to book? Let us know your comments or post them on our Facebook page / Google+ page

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01:12  Chart of the day
About 10 years ago, retail investors were active participants in the Indian equity markets. Total turnover of retail participants as a percentage of total turnover of the markets was as high as 84% in 2003. But since then things have changed. As seen in the chart, this percentage has been steadily declining since then. As of 2013, the retail participation in Indian stock markets has come down to 34%, which is a 10-year low. And this is at a time when the BSE-Sensex is ranging at record high levels. In fact as stated by an article in Economic Times, retail investors seem to be selling their stocks rather than buying them. The question that comes to mind is what has spooked the retail investors? One reason could be that since the fall of 2009, investors have become more and more cautious when it comes to investing in stock markets. And the recent spate of scams have not helped restore their confidence in any way. Retail investors have not made much money since the crisis. Therefore this time around they seem to be opting for bonds and deposits to park their money.

Whatever the explanation, the bottom line is that most of the movement that we see in the markets nowadays is not because of retail participants; but more attributable to institutional investors. Economic Times has stated that the participation of FIIs during this period has actually shot up to 47%. Now this in our opinion is a more worrisome figure. For everyone knows the fickle nature of FII money. One sign of trouble, and the money would flee our shores. Therefore investors would do well by continuing to keep a cautious approach when it comes to investing. Rather than giving the stock markets a complete miss, it would be better to invest only in those stocks that are fundamentally strong and are available at attractive valuations.

Retail investors avoiding the markets?
Source: Economic Times

Crisis struck US and the beleaguered Eurozone have shown us what excess debt can do to a country's growth and financial system. Now there is another country that may have a debt problem. This time it is none other than our neighbor - China. But the dragon nation faces another problem besides the debt. This is of figuring out how much debt it has. As per the Wall Street Journal, the country's government debt estimates range from US$ 2.46 trillion to US$ 4.92 trillion. The reasons for such wide estimates are the loopholes in the financial regulations as well as the country's extensive shadow banking network. For example China's financial regulations clearly state that the local governments cannot raise debt. But the loophole is that these governments can set up local government financing vehicles that can do the job for them. Such vehicles can raise debt not just through bonds but also through loans from the banks. If the loans are raised through the shadow banking network, then these loans would not even feature in any bank's balance sheets. And even if one can figure out the amount of debt the local government has taken using its financing vehicles, the question remains - should this be counted as the government's debt or an individual company's?

This is just one example of how complicated the exercise is to figure out how much debt the Chinese government has. No wonder that the Chinese government has set up a gargantuan task to figure out this amount. It plans to release these figures over the next few weeks. Given the problems that debt can create, this exercise is a crucial one for the government. But equally important for them is to figure out how to modify their own system for the future so that these figures are available at the government's finger tips.

The RBI has in the past few months given a tough time to the treasury managers in banks and financial institutions. For having to take a call on short term movement in interest rates has been rather difficult, if not impossible. The US Fed's constantly changing strategy with regard to unwinding the QE did not help either. Most importantly, the volatility of the rupee dollar rate governed the RBI's thoughts on interest rates. And as the regulator and safe keeper of the country's monetary assets, its priority was to keep liquidity risks at bay. Hence the RBI's signals with regard to movement in interest rates have been confusing at best. Needless to say, short term fixed income assets have incurred huge mark to market loss over the past few months. Banks on their part need to account for such mark to market losses, which have taken a toll on their other income. Hence the RBI has now decided to launch interest rate futures over the next two months. These will help banks and financial institutions hedge the interest rate risk for their bond portfolios. Moreover, it will help adding depth to India's bond markets.

That the auto industry is facing considerable headwinds is a fact well known. Because of firm interest rates and fuel prices and slowdown in the economy, the demand for vehicles has also taken a beating. This is not surprising given that the fortunes of the auto industry are closely linked to that of the economy. But because of demand waning, most of the capacities of auto players are quite underutilized. Indeed, during FY07-FY11, a healthy growth in the auto industry had led to quite a few capacity additions. But the growth in demand that was envisaged did not play out in the subsequent years. And so the drop in utilization rates is bound to exert some pressure on margins. Going forward, a pick up in the Indian economy is essential. This is if growth in the auto industry has to accelerate. Indeed, a rise in volumes sold will automatically flow into the margins boosting those as well.

Growth in the Eurozone bounced back to the positive territory during the second quarter of this year. This is after the zone contracting for a year and a half. But as per Ms Christine Lagarde, Managing Director of the International Monetary Fund, governments should not take it easy; and that they should continue their focus on their commitments of increasing employment and backing the regional banks. A key issue according to her is the prevailing youth unemployment situation in the zone; and addressing of the same needs to be high on the agenda for the countries. While the process would take time given the implementations of policies and changes in economic reforms to bring people into or back into the job markets, with situations such as half the youth being unemployed in countries such as Greece and Spain, it would not be long before the law and order situation could go for a toss.

In the meanwhile, Indian stock markets slipped into the red after opening on a positive note. At the time of writing, the benchmark BSE-Sensex was down by 76 points (0.4%). The sectoral indices were trading mixed with stocks in the realty and capital goods sectors leading the gains. However, stocks in the FMCG and software sector were leading the losses. Barring Taiwan, the other major Asian stock markets were trading on a firm note led by the markets in China and Japan. The major European markets opened the day on a mixed note.

04:55  Today's investing mantra
"In this business, if you're good, you're right six times out of ten. You're never going to be right nine times out of ten." - Peter Lynch
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9 Responses to "Whom can retail investors trust?"

R.Santhana Subramanian

Nov 5, 2013

Post crisis during Shah period, out of compulsion the regulator SEBI, nurtured by the successive Govts, showed a promising emergence. We even were led to believe that India can boast of the Best Regulators even exceeding the US Securities Commission. Naturally, more retailers took part with more vigor. Indian market was a force to reckon with. But unfortunately, successive Govts further slackened and so also regulators like SEBI, IRDA etc. The post 2008 crisis was a total chaos in financial market. Either the Govt or SEBI do not appear to have taken any serious effort to mend the way. The result is what we are seeing now.
You are correct in saying that SEBI needs a devoted,
true and sincere autonomy like Election Commission. Remember the serious comment by our Apex court on CBI on it's autonomy, at this juncture.



Oct 23, 2013

Sebi has no teeth that is why insolvent company like Kingfisher is trading It only possible in India This kind of situations are unique to India

Like (1)


Oct 23, 2013

India growth story is completely depend on interest and FII flow . interest can start softening soon as we cannot have the legacy to live with low inflation when the country having 2nd largest population in the world. my bet on cutting interest because of slow down on growth- which soon or later need to be addressed. the big event 2014 lok sabha election surely will give boost and if MODI comes in to power - Indian market can see a decent rally may be Sensex trading around 26-27000 level. the worry is retail participation which is from 3-4% came down to bellow 3% from last 2 years because of lac of confidence. we shd keep in mind that Indians are having tendency to spend high and also earn easy money, which only stock market can give. keeping all factors in mind I do feel the mother of bull market will start 2nd half of 2014 - if MODI comes in to power. ( keeping usa issue in mind )

Like (1)


Oct 23, 2013

Thank you so much for these informations.Interesting articles and informations.easy to understand

Like (1)


Oct 23, 2013

It is by now clear that Jignesh Shah and his coterie are gang of thugs. The CEO Sinha's wife traded without margin on MCX violating all rules. The guy is in custoty. But we are interested to know what happens to Shah. He is master mind. The loss to investors of MCX and FT is huge. MCX should be rescued from this crook like Satyam in 2008. But MCX has signed related party contracts with FT for its technology platform and that can make MCX liable to vey serious penalties if MCX decided to scrap this trading platform. This is all criminal and a guy with 25% stake has undermined interests of 75%. If this is not criminal then what is?

But I have one important to point to make. It was clear that since 2010 there were doubts on the integrity of this management. Still brokerages like JM Financial gave buy call as early as Feb 2013...4-5 months before implosion happened. What due diligance these analysts do? Ot they just crunch the numbers and listen to management vax eloquent about rosy future? How can we trust these sell side analysts? Are they really tracking management. Same happened with UFlex and Satyam.

Like (1)


Oct 22, 2013

Though you have struck a right chord, I am not sanguine about the fate of retail investor given the present circumstances of corruption, unhealthy competition and loss of credibility of the Govt and it's institutions. SEBI seems to be a hapless spectator to the goings on in the market. The so called big players in the financial markets will die their own death once the retail investors orphan the markets once for all.

Like (1)

ketan parekh

Oct 22, 2013

It is imperative to bring back trust of retail investors.
How long can we continue to depend on foreign inflows.A committee should be formed , with the best of brains to bring back retail investors.And guilty like Jignesh Shah should be sent to Jail.

Like (1)


Oct 21, 2013

Thanks for the information which I have NOT heard on any business or news channel.There is a saying "HAMAM MEIN SABHI NANGE HAIN".The reason for retail investors'
from the stock market is gut feeling as all of them may not have access to such info.

Like (1)


Oct 21, 2013

SEBI's investigation are a joke, they don't look at rigging by mgt or by brokers etc.. when there is a huge volatility in individual shares SEBI Should have investigative wing going and looking at these cases and subsequently have the prosecution strength to get the case done.
They have the data on all the trades etc.. they should use technology to get the possible insights and use fraud detection tools.

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